• Keep BUY and SGD1.40 TP, 21% upside, 5% yield. ComfortDelGro has acquired a small private hire car (PHC) operation in the UK. Although it will not materially change the earnings outlook, it is part of CD’s larger aim to grow its presence beyond Singapore. We maintain our investment thesis that CD will deliver 11% profit growth in 2023, aided by recoveries in Singapore rail ridership, Australia bus charters, UK coach services, and Singapore and China taxi services. The stock is trading at an attractive 2023 P/E of 13x vs its historical mean of 16x.

• Acquisition of a small UK business. CD announced the acquisition of Vedamain Ltd, which operates a PHC business under the KingKabs brand in Chester, UK. CD will pay GBP7.25m (c.SGD11.82m) in cash for the acquisition. Vedamain operates a fleet of about 500 PHC. Based on the last available filing, Vedamain had a cash balance of GBP0.6m and shareholder’s equity of GBP1.5m as of 30 Sep 2021.

• Ambition to grow overseas. In a Straits Times article, CD's outgoing chairman stated that the group’s next big leap would be a foray into Europe, starting with a joint bid with French transport group RATP to run three rail lines in Paris. Europe is a region where CD may not be able to start afresh, so it will grow through acquisitions. The chairman identified Europe as a key market for overseas growth, as other major markets such as North America, Africa, and India are not in its sights at the moment. CD has a target to derive 70% of its revenue overseas, up from around 45% now. Given its net cash position of SGD653.4m, ability to generate strong FCF, and available facilities of c.SGD775m, CD could undertake a sizeable transaction if an earnings-accretive acquisition is on offer.

• Unchanged investment thesis. We reiterate our view that the public transport services in Singapore, especially rail services, should witness a strong increase in ridership with higher tourist arrivals in 2H23. Singapore’s taxi business could see a gradual reduction in rental rebates, and China taxi businesses should benefit from the reopening of the country’s economy. The strong FCF generation, we believe, will enable CD to pay higher dividends in 2023F-2025F. We estimate a 65% payout ratio for 2023F-2025F, which implies yields of 5-6%. Despite the headwinds from higher operating costs, uncertainty over the timing of indexation formulas, and lower bus service fees, CD could deliver c.10% profit CAGR in 2022-2025F. For the Bukit Merah and Jurong West Bus Packages in Singapore, we maintain our base case assumption that CD will retain these packages, but will see lower margins for the contract extensions. Note: Our TP includes a 12% ESG premium (based on our proprietary methodology) over the SGD1.25 FV.

Source: RHB Research - 21 Mar 2023